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The Canopy/Acreage Deal Puts Canadian Cannabis Back on the Map

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“We’re very bullish on the globe, on the U.S. — not so much on Canada,” stated CB1 Capital partner Loren DeFalco recently.

DeFalco wasn’t talking about the Canadian cannabis companies themselves but rather the cannabis marketplace in this country where companies like Canopy Growth (TSX:WEED)(NYSE:CGC) face severe advertising restrictions and regulatory choke holds that keep retail distribution from really thriving.

Sure, Canadian cannabis leaves a lot to be desired right now, but five years from now companies like Canopy will make sure it’s a different story.

Canada’s smaller market

And it’s hard to ignore the fact that California’s pot market is bigger than all of Canada, a reality that’s haunted Canadian companies for more than a century. The U.S. market, even in its current half-in, half-out state of legality, is still far more attractive in terms of population.  

Currently, there are 10 states where recreational pot is legal including California. The population of those states adds up to almost 80 million people, or more than double Canada’s population. Of course, the U.S. market is more attractive.

However, that doesn’t mean investors should avoid cannabis companies based in Canada simply because their home market is a little dysfunctional at the moment.

Canada’s cannabis marketplace will grow over time to be an attractive middle-market opportunity. The black market here in Canada accounts for 81% of the demand for cannabis. By 2020, it’s expected to drop to 59% by the end of 2020.

It won’t be nearly as big as the U.S. and several countries in Europe, but it will hold its own.

Plenty of expertise

What Canada might lack in market size, it more than makes up for it in terms of industry experience. There are a lot of smart people working in facilities from coast-to-coast to produce some of the best pot in the world. You can’t put a dollar value on this intangible.

The global market might be a big one, but the head start Canada’s gained from being the second country in the world to legalize cannabis will remain an advantage as long as Canadian companies continue to take risks, innovate, and reach well beyond its borders.

The Acreage deal

Canopy’s recent agreement to obtain the right to buy Acreage Holdings for US$300 million down in cash and the issuance of 0.5818 Canopy Growth shares for every Acreage share held once cannabis is legalized on the federal level in the U.S. is a game changer.  

The tentative acquisition is valued at US$3.4 million. It gives Canopy future access to a business with cannabis licenses in 20 states without running afoul of the New York Stock Exchange or federal lawmakers.

While there is a risk that the feds won’t legalize pot within the seven years of the agreement between the two companies, I believe it’s a risk worth taking. Canopy already has a lot on its plate both here in Canada and overseas, and the delay will give it more time to understand the U.S. market while getting edibles and infused drinks ready for Canadian consumption.

It made a smart move partnering with Constellation Brands to make infused drinks — not to mention bringing an owner with a boatload of global distribution experience onboard — and now it’s looking to dip its toe in the U.S. market.

I, for one, would be shocked if, after the November 2020 U.S. election, cannabis wasn’t legalized within 6-12 months.

In my opinion, Canopy’s deal for Acreage just put Canadian cannabis back on the map.

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Fool contributor Will Ashworth has no position in any stocks mentioned.

 

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